Press Releases MARC AFFIRMS THE STATE OF KUWAIT’S FOREIGN CURRENCY SOVEREIGN RATING AT AAA

Thursday, Nov 12, 2015

MARC has affirmed the State of Kuwait’s (“Kuwait”) foreign currency sovereign rating of AAA with a stable outlook based on its national rating scale. The rating reflects MARC’s opinion of the sovereign’s ability to meet its foreign currency obligations in full and on time. The government of Kuwait has no debt rated by MARC. The rating also serves as a country ceiling for ringgit-denominated debt issued locally by issuers domiciled in Kuwait. Transfer and convertibility (T&C) risks are reflected in the country ceiling. The analysis is based solely on information available in the public domain.

The AAA rating with a stable outlook reflects Kuwait’s financially stable economic system that is supported by large oil reserves, a strong fiscal buffer and a solid external balance sheet. Its strengths are, however, tempered by the economy’s overdependence on oil and poor governance that is affecting the pace of reforms and economic development.

The rating is underpinned by Kuwait’s position as one of the world’s richest countries. In addition, the country has a financially stable economic system that is supported by large oil reserves. Real gross domestic product (GDP) growth in 2014 fell to a post-Global Financial Crisis (GFC) low of 0% from 1.0% in 2013, partly on account of the oil price collapse during the year. Falling oil production in 2H2014 due to the closure of a neutral zone oilfield, as well as moderating activity in the non-oil sector, also contributed. Notwithstanding the recent fall in growth pace from the post-GFC high of 10.6% in 2011, the economic system remains financially stable. Growth in 2015 is expected to rebound slightly to +0.3% and to improve further to +2.4% in the following year. The government has considerable financial buffers to cushion some of the impact from lower oil prices on growth. Some USD115 billion will be spent on projects under the new National Development Plan (2015–2019) to diversify the economy away from its overdependence on oil and support non-oil growth.

Kuwait’s strong fiscal buffers are a rating support. Over the past ten years, fiscal surpluses averaged above 20% of GDP and total government gross debt is very low, standing at just 3.2% of GDP (March 2015). Notwithstanding this, Kuwait’s fiscal performance has been on the decline. In fiscal year (FY) 2014/15, its fiscal surplus as a percentage of GDP fell to 17.4% from 36.1% in FY2011/12. After mandatory transfers and excluding investment income, Kuwait’s fiscal balance for the same fiscal year fell into a deficit of 4.4% of GDP from a surplus of 11.7% in the previous fiscal year. Meanwhile, projections of the International Monetary Fund (IMF) indicate that Kuwait’s fiscal balance (before mandatory transfers and excluding investment income) in FY2015/16 will fall to a post-GFC low of 2.8% of GDP. Despite a declining fiscal performance, Kuwait’s sovereign credit risk profile is not expected to worsen, at least over the short to medium term, because of its exceptional financial wealth.

Another rating support is Kuwait’s solid external balance sheet. For over a decade, its current account (CA) surplus stayed above 20% of GDP, thus helping to keep its vulnerability to external financial and economic risks low. Since the post-GFC high of 45.2% achieved in 2012, however, its CA surplus has fallen somewhat. In 2014, it fell to 31.2% of GDP, a level that many countries would be envious of. The new reality of low oil prices is an indication of the need to diversify Kuwaiti exports in order to avoid further pressure on its external balance sheet over the long term. Over the short to medium term, however, Kuwait’s external position will likely remain strong. Its external breakeven oil price, estimated at USD38.7 per barrel, is the lowest among Gulf Cooperation Council (GCC) member countries.

The rating takes into account Kuwait’s overdependence on oil. With oil comprising more than 95% of its goods exports, the sector contributes significantly towards government revenues and plays a major role in driving economic growth. Nonetheless, overdependence on volatile oil exports has caused fluctuations in the country’s economic performance and the new realities of the global oil market are making Kuwait’s growth model increasingly unsustainable. The oil sector has not been creating enough jobs. In addition, it has resulted in the creation of large public sector employment, the crowding out of the non-oil tradeable sector, and declining productivity. Kuwait’s fiscal performance, which has already been deteriorating somewhat, is being hit by low oil prices. This is despite Kuwait having the lowest fiscal breakeven oil price (2015: USD49.4 per barrel) among GCC member countries. Any unsuccessful attempts at economic diversification to strengthen growth potential could lead to social unrest.

Kuwait’s rating is also tempered by poor governance and a slow pace of reforms. Its weak institutions have resulted in the sluggish implementation of public investment priority projects, and this is a major downside worry. Besides being lowly ranked in the World Bank’s Worldwide Governance Indicators (WGI) project, it is also lowly ranked in the World Bank’s Ease of Doing Business 2015 report. Kuwait needs to strengthen its growth potential very badly, and the new National Development Plan needs to be properly executed for that to happen. However, the government would first need to improve governance.

The stable outlook reflects MARC’s expectations that Kuwait’s macro-policy stance remains unchanged, as well as of a generally improving global economy with relatively stable oil prices. We also base our stable outlook on expectations that the political situation remains stable, there are some successes in reform efforts, and there is better execution of the new economic development plan.

Triggers that could prompt a rating discussion include further political bickering that could hamper decision-making, the passing of the budget, as well as the progress of the National Development Plan (2015–2019). A worsening of the geopolitical situation in the Middle East, especially if conflicts in Syria and Iraq widen and spill over into Kuwait, would exert negative pressure on the rating.


Contacts:
Quah Boon Huat, +603-2082 2231/ boonhuat@marc.com.my;
Nor Zahidi Alias, +603-2082 2277/ zahidi@marc.com.my;
Afiq Akmal Mohamad, +603-2082 2274/ afiq@marc.com.my.